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Understanding the Financial Crisis
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How did the world financial crises started? Why is it going on? This video explains it in an easy way.

Welcome to WSYK, What Should You Know, I'm Ethan Bloch in the "What Should You Know".

What should you know, you are watching What Should You Know because that's beyond this what should you know.

So when someone comes up to you and asks if you know about the housing downturn, the credit crisis and the potential government bailout, this is what you should say.

Of course I know about the housing downturn, the credit crisis and the potential government bail out. Are you serious? But do you really have any idea what any of this means.

So it all started with houses, but everybody knows that. But most people don't know why or have any clue how it got so fracking bad. So, I am going to break it down for you as I always do, right here on WSYK.

In 2001, the houses became superstar investments. In some places doubling in value in a single year. So everybody started buying one. Even the people who couldn't afford that house, they were buying, but they weren't worried, because at the time it seemed the house prices never fall in value and the banks were not worried because if the people couldn't pay their mortgages, the banks could just foreclosure on their house and sell it a tidy profit because, duh!, house prices just never fall in value.

How could so many people do so many stupid things? Well, you see it's hard to believe the party is ever going to end, when the party is making you unbelievably rich. But as we all know the party must end and it did and millions of Americans started realizing, okay I can't afford this house that I bought. So the foreclosures began, but there is also a whole another slew of Americans who bought a house that they could afford but the house they bought was just way over priced. So what did they do? They just walked away.

But that's just one calamity and we still got a whole knapsack full others. It is because the vast majority of home loans are originated by one company then resold to another company and then repackaged into beautifully sounding names that no one understands such as mortgage backed security, collateralized debt obligations, that we are in such a terrible mess that we are in.

And this my friends is where it starts to get wicked crazy. The whole system works like a cell. A bank gives you a loan and re-sales that loan, then the loan is cut into slices, just like if somebody took your credit card bill and sold off all the interest you are ever going to pay to one party and sells all the payments you are ever going to make excluding interest to another party, this is what they were doing with home loans, but that's not all, then these crazy financiers would put together thousands of these different mortgage securities into pools. Then they would slice and dice these pools into different securities based on a risk and repayment.

Now imagine financial institutions all over the world buying slivers and slices from all these sliced and diced mortgages which are backed by overpriced houses and people who couldn't even afford the houses they were buying to begin with.

So now you maybe like, Oh! Great, that didn't make any sense to me. Well you are not alone, because it doesn't make any sense to anybody and that is the problem. The banks who bought these sliced securities have no idea of what their risk is and if a bank doesn't know what its risks are, no one wants to lend money to that bank and if banks don't lend money to each other, banks don't lend money to you and me, and if you and me can't borrow money to start a business, operative business, use our credit cards, buy a house or a car, the economy comes to a screeching halt.

So, what our government is trying to do is to create a fall out fund of sorts to buy up all these toxic CDOs, MBSs and F-U-C-K-E-Ds getting them off the books of the banks, so the banks will start trusting and lending money to other banks. It's like a General jumping on a hand grenade that one of his own soldiers dropped in their bunker, sacrificing himself to save all the other soldiers, even the schmuck who dropped the grenade.

That's what I know about the housing downturn, the credit crisis and the potential government bailout. Are you serious? What?

This has been another episode of WSYK, What Should You Know. I am Ethan Bloch in What Should You Know.

What should you know, you are watching What Should You Know because that's beyond this what should you know.

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